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Taxes on cryptocurrency: Do I have to pay tax for my coins?

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When Satoshi Nakamoto created the world’s first widespread cryptocurrency, Bitcoin, he envisioned a currency that would allow people to send and receive money anonymously without the need for a central authority such as government. However, governments cannot allow people to send money anonymously as this may give rise to tax evasion, money laundering, and other illegal activities. Many people who got into the cryptos never thought about taxation. Nevertheless, in 2014, the Internal Revenue Service (IRS) issued a notice on cryptocurrency regulation.

The following text is relevant for and showing the situation in the United States of America only and is not to be considered as legal advice. Since the situation in your country might be different, please consult the local authorities.

IRS and cryptocurrency taxation

The application of tax laws on virtual currencies such as Bitcoin, Ethereum, and Litecoin among others remains a gray area that is more than confusing to many people. Most people rarely think about tax implication when getting into the crypto space. Despite this confusion, IRS maintains that cryptocurrency transactions are taxable. Although the notice is not as binding as regulation, it can be regarded as a tax authority.

For tax purposes, IRS treats cryptocurrencies like property such as stocks, bonds, house, etc. The agency defines cryptocurrencies as “convertible virtual currency.” According to this definition, not all cryptocurrencies behave in this way. However, most of them, Bitcoin and other major coins behave this way.

You have nothing to report if you have not sold any coins that you have bought, as you haven’t made any gain. However, if you have bought and sold different cryptocurrencies, you have the tax liability and the responsibility of reporting any gains or capital losses incurred. Given the penalties and fines associated with tax evasion, it is advisable to report all your crypto trades to the IRS.

Reporting on crypto taxes is quite different from that in other properties. Your brokerage firm or bank facilitates your tax reporting by sending you a 1099 tax form on stocks or bonds sales. When you are involved in cryptocurrency trade, it is your role to report to a taxman. However, when you make $20,000 in gains and conduct over 200 transactions, Coinbase exchange will issue you a statement. This service only favors those who are serious in this sector.

When you are a crypto trader, you have to pay taxes for any capital gains realized. However, in case of losses, you should lower your tax bill. When filing your tax, you need to indicate the day you bought the coin(s), the amount you spent, selling date, and the amount you received for the sale. Unfortunately, some people do not understand the importance of tracking their bases.

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Challenges in filing cryptocurrency taxes

You have to pay different taxes to IRS depending on the way you disposed or received your cryptocurrencies. You may be fined up to $250,000 and even a jail term for failing to file your taxes. Although you may face many challenges when reporting your cryptocurrency transactions, you should not give up. You should not avoid this process.

Given that there is no clear guidance from IRS on how to go about filing cryptocurrency tax, it appears the agency feels it is up to the taxpayers to figure out the cost basis. Getting such information while dealing with long-term stocks is quite easy as you only need to go through historical prices and dividend payments. However, when it comes to long-term capital gains with cryptocurrencies, the process of calculating the tax rates is not that straightforward.

Apart from the presence of thousands of cryptocurrencies, the number of exchanges is at least 190. The prices of the different altcoins vary from one exchange to the other. Consequently, it is difficult to estimate accurately the prices that you bought or sold your coins. It becomes even more challenging when you use the coins in different places.

Sometimes, you may receive cryptocurrency gifts from your friends. In such a case, you also inherit the cost basis of the concerned friend. You may also use the weighted index especially when you have been using various exchanges. If you are a crypto miner, you should know the value of the given coin at the time you received it to add it accurately in your gross income.

You should file self-employment tax if you receive payments from a third party for mining. Besides, if you work in a crypto firm, your employer should withhold the appropriate income taxes. Therefore, when you are paid in cryptocurrencies or when you are involved in crypto mining, you should make sure you have worked out your cost basis.

How to pay tax for your coins

You should file your cryptocurrency tax if you have purchased, sold, or traded any virtual currency in a given tax period. Given that many young people are involved in the crypto sector, most may be unfamiliar with capital gains taxes. This is because they may not have any other property. Sometimes, it is advisable to approach a licensed tax professional to help you in completing this daunting task.
Many exchanges are providing services and support with regard to cryptocurrency taxation. You could use your exchange’s own tax reporting as this could save you a lot of time and resources. Do not shy away from contacting your cold wallet company to establish if they offer such services. If they do not, they may consider providing such services later due to the high demand from their customers.

Many companies have already emerged to fill this important gap and make cryptocurrency taxation an easy process. Do online research to establish reliable companies providing cryptocurrency taxation services. Software companies such as Libra are already assisting crypto traders with their taxation. Many of these companies use blockchain technology to produce the best tax results possible. Given the consequences for not filing taxes, you should not sit down and do nothing.

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